Frequently Asked Questions
How does a stock option loan work?
Lexus will make a non-recourse loan to you which will include the amount necessary to exercise your stock options, plus an amount for you and the amount necessary to pay taxes, if any. You will only have to pay interest on the loan upon the sale of your shares.
Why should I borrow to exercise my options now?
The upfront cost of exercising stock options can be high and, for many cases, unaffordable. Borrowing enables you to realize the benefits and tax advantages of direct share ownership. It also shifts the financial risk to Lexus, as the lender, in the event the company's value turns down. Exercising your options now may reduce your tax liability. In many cases, when you exercise your options, the difference between the exercise price and the current value of the shares is taxed as ordinary income. If the shares appreciate over time, that difference grows, resulting in a higher tax liability if you have delayed exercising your options.
Who owns the stock?
After you exercise your stock options, you continue to own the stock. We enter into an agreement directly with you regarding the sharing of proceeds and custody of the shares.
Is this the same as a secondary market sale?
No, in a secondary market sale, you forfeit all future profits in exchange for a fixed price at the time of the sale. Rather than giving away all potential future value of your shares via a secondary sale, a transaction with the Lexus allows you to retain the upside potential on a shared basis with us.
Can I sell my stock to Lexus Capital?
Yes, we can buy your stock. However, we believe that a stock loan is more attractive to you. With a stock loan you retain the upside appreciation of the stock, but without the risk of any downside if the stock value declines.
Does the company have to approve to a stock option loan?
Some option agreements state that option shares may not be pledged as collateral for a loan. Lexus can seek a waiver of this pledge restriction for company employees. If the waiver cannot be obtained, the loan is structured with different terms such as a recourse structure to the borrower, without a pledge of the shares.
What is the minimum loan amount?
The current minimum loan amount is $100,000.
What are the costs to borrow under the program?
In most cases, the borrowing costs will include:
• An origination fee based on a percentage of the amount borrowed, paid to Lexus at the time the loan is issued.
• Interest on the principal amount of the loan will compound annually at a minimum of 6%, paid entirely at maturity or realization of the value of the shares.
• A stock fee consisting of a portion of the exercised shares (or equivalent cash value). The percentage of shares is based on factors including the assessment of the expected time horizon of the loan and the perceived risk of a successful exit at a higher share price.
What is a stock fee and when is it paid?
The stock fee is a percentage of shares held or a percentage of the proceeds that are received upon the sale of the shares. If the company does not have a pledge restriction (or waives the pledge restriction), the stock fee will be paid in shares at the time of the loan for non-qualified stock options (NSOs), and will be paid in one year in the case of incentive stock options (ISOs). If the waiver is not executed, a stock fee amount is payable at maturity or upon realization of the value of the shares.
What are the additional loan terms?
Loans will have a two- to five-year maturity, Loans are secured by the borrower’s exercised shares, are not-callable by Lexus, and can be repaid by the borrower at any time without penalty. The loan will be repayable early if the company is acquired for cash or completes an IPO.
What happens if the company is acquired?
Generally speaking, if the company is acquired for cash, the loan will become due and payable immediately once you receive the cash upon surrender of your shares. If the company is acquired for stock, the loan will continue in effect pursuant to its terms, with the stock of the acquiring company substituted as collateral. However, the loan becomes due and payable as soon as that stock becomes freely tradable.
What happens if the company has not gone public or been acquired prior to the maturity of the loan?
At the maturity of the loan, you must repay the principal, the accrued interest, and the stock fee (or equivalent cash value) if it has not already been paid. If you can sell the stock, the cash proceeds from the sale are used to satisfy the outstanding balance of the loan. Alternatively, if a sale cannot be completed, shares equaling the value of the outstanding balance of the loan (including accrued and unpaid interest and the stock fee) will be transferred to the lender in satisfaction of the note. Lexus will determine the fair market value of the shares based on company-provided valuation, transaction history on secondary markets, primary capital raises, third-party research, and any other relevant data.
What happens if the company fails and the shares become worthless?
The worthless collateral will be transferred to the lender in repayment of the loan. You have no further liability. The lender will experience a capital loss.
Can I participate in the program if my options have not vested? What happens if I quit or am terminated before the shares vest?
In most cases, the loan program will only provide loans to exercise fully vested shares. In some limited instances, unvested options may be eligible, which will be determined on a case by case basis. Usually an employee has 60 to 90 days from the termination date to exercise vested options before they expire. This provision is clearly identified in most stock option agreements.
What companies is Lexus interested in for the loan program?
Lexus is seeking strong VC-backed, late stage pre-IPO private companies with exceptional business momentum that have secured capital at increasing valuations.
What are the tax implications of exercising incentive stock options?
Almost all options granted to early employees in tech companies are Incentive Stock Options (ISO). When you exercise an ISO there is no immediate tax due. Instead you incur an Alternative Minimum Tax (AMT) liability equal to approximately your ordinary tax rate of the spread between your strike price and the fair market value.
If you sell your stock in the same tax year as you exercise it, that is a disqualified disposition and you do not pay AMT, you pay ordinary income tax (about 50% in CA).
If you choose not to sell your stock in the same tax year, you will owe AMT the following April 15th (you may have to make estimated quarterly payments as well). The benefit of an ISO vs a NQO is that if you wait to sell your stock for one year after you exercise, you pay long term capital gains which are about half the ordinary income tax rates.